Need to review contract labour law reforms

Reforms in contract labour law – the Contract Labour (Regulation and Abolition) Act, 1970 – has been one of the much debated “hard” labour law reforms issues in the post-liberalisation period in India. Trade unions are opposed fundamentally to the contract labour system (CLS). They see the potentially exploitative side of the use of the CLS even by large enterprises which otherwise observe high labour standards.

The trade unions say that by employing contract workers on regular work performed by permanent workers, enterprises ask for stoppage of CLS in permanent work and legislating equal work equal pay, which exists currently as per law.

In a fundamental sense, the employers do not mind reasonable regulations and strict implementation of the law but demand removal of the “abolition” clause and are averse to equal pay equal work principle owing to market logic.

Employers also demand that they should be permitted to include “fixed term employment” as another category of employees in the Industrial Employment (Standing Orders) Act, 1946 (IESO Act). Recently, the IESO Act was amended following the introduction of this category in the new textiles policy unveiled to give a boost to this export-oriented sector.

Labour laws need to be instruments of balance. They should follow benevolent historical principle of supporting the vulnerably-placed social actor in the society and ensuring that law serves the needs of the business as well as labour welfare.

Four empirical realities need to be borne in mind while advocating reforms of this law.  One, not only has contract labour incidence increased faster but also they are increasingly performing the work that is being done by permanent workers. They perform work for longer years in the same plant. Two, the wage gap between the permanent and contract workers in general and especially in cases of equal work performed by both is high.

Three, these workers are denied trade union formation and collective bargaining rights owing to their easy dispensability.  Four, social security systems are yet to cover them fully.  It is in this context that the contract labour law reforms needs to be reviewed.

The business arguments and practices concerning CLS make poor economic sense while providing short-term economic advantage in terms of low cost and numerical flexibility.  Low and fluctuating job tenures prevent reaping of returns on skill investment and discourage learning effects.

Low wage syndrome weakens current aggregate demand besides low human capital formation (also owing to denial of or weak social security combined with privatisation of education and health), poor prospects for marriage and social reproduction of labour, bleak post-work life and so on. The simplest economic logic against competitive cheap labour is one of where it ends and whether there can be even medium-term top achiever on this front given the inherent race to bottom.

Some principles for reforms in the two labour laws can be laid out now.  One, analysts of NSSO data have revealed that little more than three-fourths of workers do not have a formal job contract and close to 70% of them do not enjoy social security. The first reforms mandate on the government is to formalise labour market by making it compulsory on the part of employers including the contractors to issue job contracts and violations of which like in China should invite heavy penalties.

Two, to ensure freedom of association and collective bargaining rights for these workers, suitable changes must be made in the relevant laws including a specific provision of unfair labour practice of anti-union acts covering contractors or principal employers. Research evidence shows that where they are able to organise and bargain, there prevails better employment conditions.

The recent Supreme Court (in Bhilwara Dugdh Utpadak Sahakari Samiti Ltd v Vinod Kumar Sharma, (2011) judgment blasted the practice of employers seeking to “subterfuge” the law by devious practices of using sham contracts. The present legal position is that an industrial dispute has to be raised for regularisation of contract workers after shamness of contract is proved.  Suitable legal remedies must be erected to provide instant regularisation of these workers in such cases.

Social securities

Three, duping on social securities is largely an issue emanating from small-sized petty contractors.  Thus, the eligibility of a contractor to obtain licence should be based on financial parameters as well and the evi-dence of compliance of social securities which must be made compulsory for renewal of licences. Four, it is time to legalise CLS in periphery services following the Andhra Pradesh model but with strict regulations on terms and conditions of employment.

In non-periphery works, contract labour should not only be prohibited and abolished but also be automatically provided opportunities for regularisation. The economic and functional logic is that CLS is prohibited because it is exercised in tasks which are not meant for it. On abolition, the “task” does not vanish and it requires workers. Then why not give first opportunity to the contract workers working prior to “abolition” rather than someone new?

This is not new as similar provisions exist in the Industrial Disputes Act in case of retrenchment. However, their recruitment should be subject to suitable recruitment processes obtaining in a firm. It makes business sense as some “skill investment” must have been made on them and contract labour will have to work elsewhere.

Six, if the industry wants principal-to-principal commercial relationship in place of labour contract system, then equal pay for equal work should be made as law because a principal employer would have paid the same level of wages thanks to collective bargaining agreement. Besides, trade unions and collective bargaining in the second principal will ensure that also. Finally, if fixed term employment is provided twice, the employee concerned must be regularised like in China.

(The writer is Professor, XLRI School of Management, Jamshedpur)